Announcing iContact’s Series B Investment

August 30, 2010

Eight years ago when Aaron Houghton and I met at UNC, we never fathomed we’d have the opportunity to build the nascent iContact into a great global company based here in North Carolina. As iContact passes 225 employees and $40M in annualized sales, we see an opportunity to do something rare—to build a venture-backed IT company here in the Triangle from start-up to IPO. Today, we’re announcing a critical milestone on our journey.

I’m thrilled to share the wonderful news that iContact has closed on $40 million of Series B venture capital funding from JMI Equity of Baltimore, Maryland. We worked with Allen & Company out of New York as our investment bank advisor in this round.
This $40M comes in addition to the $13.3M we’ve raised so far from our investors IDEA Fund Partners, Updata Partners, and North Atlantic Capital.

We’ll be using these new funds to make significant investments in sales and marketing, back-end technology, our product features and usability, global expansion, and of course our people that drive all of our success.

Over the past eight years we have been on a growth spurt, increasing from $2M in annual sales when we raised our first round of funding in May 2006 from IDEA Fund Partners in Durham to $40M in annual sales today four years later. We have been fortunate to find great people to join us at iContact as employees and investors. We would not have been able to get to this point without the amazing team that is with us.

For us, this is just the beginning of building a company that will be here in North Carolina for many decades to come. iContact’s vision is to “build a great global company, based here in North Carolina, for our customers, employees, and community.”

Building a Unique Company, For the Long Term

We are working on building a unique company, one that sees social and environmental responsibility as additive to success not counter to it, one that invests heavily in building a fun and creative place to work, and one that cares about maximizing value created in the long term not profits generated in the short term.

Our business philosophy says “The purpose of business is to solve human problems and that if we focus on creating positive value for our customers, employees, and community we will maximize financial return for our investors and shareholders.”

We will use these new funds to invest in building iContact into a customer-focused socially responsible high-growth company with a wonderful work environment and company culture. We are glad to be part of the conscious capitalism movement that the B Corporation community is forwarding and wish to provide another example for what a socially responsible company with a great employee culture can become.

Our Three Promises

These new investment dollars will enable us to better fulfill what we call our Three Promises. Our Customer Promise is to “help SMBs succeed and grow.” Our Employee Promise is to “create a wonderful work environment that attracts A+ talent.” Our Community Promise is to “make a positive wake in our local and global communities.”

Our Customer Promise
Working toward our Customer Promise, we have recently rolled out our brand new MessageBuilder to our 65,000 customers and 700,000 users that has been under development for the last year. MessageBuilder makes it extremely easy for anyone to create a beautiful, professional, effective communication. We currently have 110 templates with the new MessageBuilder and will have hundreds more by year end.

We will also be rolling out the brand-new iContact for Salesforce next week, which has been in limited release for the last six months. We acquired in April to enable added event marketing capability for our customers. These product investments are in addition to an upgraded back-end infrastructure, an expanded QA team, and a six person in-house User Experience Team who talk to customers and users to help us design extremely easy to use features and functionality.

Our Employee Promise
Working toward our Employee Promise, we will be moving to brand new company headquarters on October 24th in Morrisville, North Carolina in Perimeter Park within the Lenovo Campus that will allow us to expand to 550 team members.
We have recently implemented on-site monthly massages to add to our list of unique employee benefits like on-site car washes, Bagel Mondays, monthly lunches, unlimited free sodas, and a culture that encourages Nerf gun battles, dressing up in drag, and creative expression.

Our Community Promise
Working toward our Community Promise, we rolled out our 4-1s Corporate Social Responsibility Program which includes giving 1% of payroll, 1% of product, 1% of equity, and 1% of time back to the community.

For 1% of payroll we will contribute $150,000 in 2010 to 501(c)(3) non-profit organizations. For 1% of product, iContact is now free of charge to any North Carolina non-profit to send newsletters up to 10,000 subscribers. For 1% of equity, we have committed 1% of the equity in iContact to the iContact Foundation to endow the foundation with funds to expand our ability to give back permanently.

For 1% of time, we have provided each employee 2.5 additional days off per year to volunteer in the community during business hours. When we started the year, I set a goal of 1000 hours of community service in our first year. iContact employees have already completed 1200 community volunteer hours and it is only August!

Special Thanks

We worked with Brad Wolosen, Jit Sinha, Bob Nye, and Krishna Potarazu from JMI Equity’s Baltimore Office on this fundraise. Brad and Jit will be joining Aaron, myself, and Carter Griffin from Updata on our Board of Directors.

We used Allen & Company to represent iContact as our investment bankers on this transaction, working with John Griffin, Dave Wehner, Kemp Webber, and Michael Melnitzky.

We worked with Joey Silver and Sarah Loya out of DLA Piper’s Atlanta office and Neil Bagchi of Bagchi Law, with Mark Burnett, Kathy Fields, and Maggie Wong representing JMI at Goodwin Proctor.

Special thanks go to our internal deal team of Tim Oakley, Ben Redding, Bryan Conner, Robert Plumley, and Susan Harrison and to our full Senior Leadership Team who endured two months of due diligence requests while still getting their day jobs done.

Our goal is simple—build a financially successful socially responsible company based right here in the Triangle that becomes the global leader in email marketing software and services for SMBs.

Thank you to all of our customers, employees, investors, mentors, advisors, and supporters who have helped us get iContact to this point and here’s to the road ahead!

Brette Simon on Legal Issues for VC Backed Firms

June 18, 2010

Session 5, Brette Simon on Legal Issues for VC Backed Firms
EO/MIT Entrepreneurial Masters Program
Year Two, June 18, 2010

Brette Simon of Jones Day is talking about legal issues for VC backed firms. She did a great job and this was a really good refresher. Here are my notes from the session…

Part IDos and Don’t for VC Backed Companies
(or Companies that want to be Venture Backed)

Not having these things buttoned up can cause investors to not want to invest or provide lower valuations.

  1. Shareholder Agreement – Have a shareholders agreement (buy/sell agreement)
  2. Corporate Records - Maintain corporate records (make sure you keep Board meeting records, Board approvals, a copy of stock certificates)
  3. Board Minutes - If you hold a Board meeting, take minutes, put the minutes in the record book
  4. Shareholder Loans - If you loan money to shareholders, paper them (interest rate, amount, maturity date)
  5. Buy-back rights - Make sure the company has the right to buy back options or restricted stock if they leave the company (repurchase right).
  6. Series of Shares - Minimize the number of series of shares (Series A-H might scare investors)
  7. Types of Options – There are Incentive Stock Options and Non-Qualified Stock Options. Each has different tax treatment.
  8. Phantom Stock – Consider using Phantom Stock – gives economic value without giving away voting rights (no exercise price and can be better than options as easier to exercise prior to liquidity event)
  9. Intellectual Property Protection – use proprietary information and assignment of inventions agreement to ensure the company owns everything employees created. Without it being signed, original investor can come back and claim right to royalties to assets of the company. Have each employee sign when they start.
  10. Personal Expenses - Do not run your personal expenses through the business. It’s not good for investors to see. You don’t want things coming out of due diligence that don’t look right. Can allow the IRS or a creditor to pierce the corporate veil and go after shareholders individually if you co-mingle personal and business because you didn’t honor and respect the corporate entity. Travel & Entertainment line item is getting attention from IRS right now.
  11. Staff Classifications – Proper classification of overtime and 1099 contractors vs. employees. If you’re controlling what time folks show up and they’re working 40 hrs/week, likely need to be treated as employees.
  12. Employee Handbook - Have an employee manual and handbook that sets forth the rules and regulations and protocols, and have it signed by each employee. Have each new hire verify in writing they have not taken any IP from their former employer.
  13. Termination Release – When employees leave/quit/are fired have them sign a release. You have to give consideration for the release (some severance).
  14. Employment Contracts – Avoid long term employment contracts (use at-will employment letter)
  15. Insurance – Get EPLI insurance (employment practice liability insurance), difference from Errors and Omissions (E&O) and Director & Officers (D&O) insurance. EPLI protects against sexual harassment claims and wrongful termination.
  16. Long-Term Contracts - avoid long term contracts without ability to terminate relatively quickly. Negotiate in 60 day termination clauses into 12 month contracts.
  17. Rights of First Refusal (ROFR) - Make sure people don’t have the right of first refusal to buy your company as this can block the sale of a business even if they are minority.
  18. Integration & Merger Clause – make sure in all your agreements. Says anything we talked about before this final agreement (oral agreements, etc.) is gone and all that matters is what is in this document.
  19. Attorney Fees – In contracts have attorney fee provision that says loser pays attorney fees in any litigation.
  20. Arbitration vs. Litigation - Benefit of arbitration is all private. Everything in a court is public. Litigation is more expensive. Arbitrators tend to split the baby and meet in the middle. ‘Mediation’ can be good to put in document prior to binding arbitration, which is non-binding and less expensive.
  21. Financial Reporting Systems – critical for investors. A good controller or CFOs is worth their weight in gold. Investors what to know revenue and profit data broken out as much as possible (by product, region, SKU, etc.). You need to close your books once per year and give monthly data. Clean up your old bad receivables.
  22. Audits – Investors preferred audited financials once the company reaches any scale (>$1M/yr in revenue). Can cost around $15k-$30k. If you don’t have audited financials, need really solid CFO. Without these investors will look for things that are wrong and give a haircut to the price. Minimize reasons investors can haircut valuation.
  23. SAS 115 letter – Make sure the auditor gives you this after audit if you do one to tell you about your financial controls (aka management letter)
  24. Management Team & Succession Planning – The company needs to be able to succeed without you. Make yourself irrelevant over time. Don’t have ‘founderitis’ where it is all you that has the operational control or critical sales relationships. Try leaving for 3 weeks and see what happens.
  25. Customer Concentration – Make sure your largest customer is no more than 20% of your total revenue to reduce investor concern. Particularly of concern to a financial buyer who raises debt to buy your business. They lever the acquisition using debt capital. Not as concerned to a strategic buyer.

Part II – Raising Capital

  1. Friends and family round – often sell common stock to instead of preferred stock. Likely the only money you can get pre-prototype when you’re just getting started. If you can self-finance through this stage, do it.
  2. Angel/seed round – Between $25k and $500k. Invest at early stage.
  3. VCs – Invest sometimes pre-revenue but usually when firm is generating $500k-$50M of annual revenue.
  4. Private Equity – Investing in companies at a later stage when they have positive EBITDA. Looking for $2M+ annual EBITDA. PE firms use debt. In an Leveraged Buy Out (LBO), put in as little equity as possible and as much debt as possible.
  5. Types of stock – Common stock and preferred stock. Investors get preferred stock usually.

Key VC Terms

Work to get multiple term sheets at the same time so you have much more leverage in the negotiation. Run a disciplined process with a target timeline for each stage and give investors who express interest a target date for receiving term sheets so you get them close to the same time (same day ideally and definitely same week) and can negotiate.

  1. Participating preferred – Double-dipping for investors and very anti-entrepreneur. Investors get all their money back first then participate equally in the upside. Avoid in term sheets if possible and look for ’straight preferred’ (aka ‘vanilla preferred’). If you have to do participating preferred, say OK but cap it at 3x or 4x return and leave the rest to the common.
  2. Liquidation preferences – Also avoid liquidation preferences above 1x.
  3. Dividends – Sometimes there are dividends (~8%) in preferred stock that compound and accrue. Avoid this if possible.
  4. Anti-dilution protection – Comes into play when in a down round. Better to have a weighted average than a full-ratchet anti-dilution protection. Full-ratchet would give investor shares at the new lower price instead of something in the middle. Broadbased weighted average better than the narrow base for the entrepreneur.
  5. Mandatory Redemption – Forces company to buy-out investors shares at some point in the future.
  6. Right of First Refusal – If you are trying to sell your shares to someone else, the investor has the first right to buy those shares.
  7. Right of First Offer – If you issue new shares in a future round, the original investor has the right to buy in pro-rata to maintain their ownership percentage. You can put in a play-to-play position to flip on head and require investor to invest pro-rate or they may lose rights (like convert their shares to common).
  8. Investor Rights Agreement - Says that investors can force an IPO
  9. Board Composition - Usually investors will have seat on Board. Initially shoot for 3 person board with 2 internally members (founders or CEO/CFO) and investor. If have to go to 5 person board with 2 internal, 2 investors, and 1 independent nominated by common shareholders.
  10. Drag Along Rights – Helps investors get out if they are the majority shareholder. Investors have an end-game. In 3-5 years they usually want to be out. This is a right that enables majority shareholder to force minority shareholder to allow the sale of the company.
  11. Reverse Vesting – Investors can unvest shares you already own and force you to vest shares over additional years. A customary term, be aware of it.

Stages of raising capital (4-6 months)

Adding this in from my own experience. Brette only mentioned this timeline lightly. This is for running a competitive process and getting multiple term sheets, which is ideal but not always possible.

  1. Decide whether to hire an investment banker or not to help raise the funds (usually costs 4-5% of the funds raised). Usually best to do yourself if early stage. Investors prefer non-ibanked deals. Investment banks can help a lot if later stage (post $25M in annual revenue) or if raising large round of more than $20M.
  2. Create executive summary (3-4 pages) and teaser deck (~25 slides)
  3. Determine firms who would be good investors
  4. Reach outs with teaser/exec summary
  5. Schedule calls with investors who are interested
  6. Schedule meetings (at their office usually or on-site at your office for later stage firms)
  7. Ask for indications of interest
  8. Execute NDAs/Confidentiality Agreements if later stage. Make sure you can assign/transfer NDAs to any buyer of your business. Early stage investors often won’t sign NDAs.
  9. Allow access to data room of initial diligence materials if there is one
  10. Set date target for receiving term sheets with interested parties
  11. Receive term sheets. Get them to be as detailed as possible.
  12. Negotiate term sheets
  13. Sign term sheet with investor you select, go exclusive with them
  14. Complete final diligence items (30-45 days ideally)
  15. Sign final documents
  16. Get funds wired

Recommendation reading on investing is book Growth Company Guide 4.0 by Clinton Richardson. Remember the specific person who will be joining your board is just as important as the firm itself.


If you’re considering selling the company, recommended to hire an investment banker to help you focus on running the business and making sure the results come in. They know what market terms on. They do it for a living. They help create an auction process. You’ll usually pay between 2%-5% of the sale price to the banker. Get a lawyer involved to help.


  • Restricted Stock Units (RSUs) vs. Options
  • 83(b) elections
  • When you exercise Incentive Stock Options (ISOs), when do you pay cap gains and when do you pay ordinary income tax?
  • When is Alternative Minimum Tax (AMT) triggered?